This article originally was published on March 2, 2009, as part of a symposium on President Obama and the New Progressivism. More than two years later, Thomas E. Woods Jr.’s warnings about the government’s meddling in the economy seem prescient, and his prescriptions seem sound for an economy heading toward a double-dip recession.

Barack Obama is already making the Clinton and Bush years seem like the good old days.

Close to a trillion dollars are being tossed around in a “stimulus” package that no one in his right mind—and I do not here include the mainstream of the economics profession, which has disgraced itself in this crisis—expects to bring about recovery. Economist Robert Wenzel rightly describes the stimulus as “just the insiders raiding the till while there is still money in it.” Trillions of dollars are likewise being thrown at financial institutions that (if we actually believe in the free market) richly deserve to go bankrupt. Nationalization of the banks is being openly discussed—an outcome our rulers assure us they would undertake only as a last resort, deploring every minute of it, and only for our own good.

We are learning what it is like to live in an Orwell novel. Our television screens are filled with people offering choices between idiotic and suicidal option A and idiotic and suicidal option B. We are being told that we must at least partially nationalize our banks, prop up zombie companies, lower interest rates to zero, and pass stimulus packages in order to escape the fate of Japan—which, um, partially nationalized its banks, propped up zombie companies, lowered interest rates to zero, and passed eight stimulus packages. We have a president who tells us we cannot rely on the free market to get us out of this mess because the free market is what got us here, as if the Federal Reserve and its bubble-inducing monetary policy never existed.

F. A. Hayek won the Nobel Prize in 1974 for showing how central bank manipulation of interest rates gives rise to the kind of boom-bust cycle we are experiencing now, and that such phenomena are not caused by the unhampered market. If by some miracle you manage to hear this point of view on television, it will be sandwiched between hours and hours of Keynesian droning.

Of course, the rationale we’re being given for the insanity is that these are crisis times, and the usual rules go out the window. That’s what Paul Krugman means when he speaks of “depression economics”—a special set of economic principles come into play in times like this that differ radically from those we would abide by under normal conditions. And so we see once again why Keynesian economics swept the board so successfully: it tells the regime just what it wants to hear. It provides intellectual cover for the expansion of government power and the seizure of private property that state officials want to engage in anyway.

“Never allow a crisis to go to waste,” said chief of staff and former Freddie Mac board member Rahm Emmanuel. He needn’t worry. The Keynesian economists who suddenly dominate public life in America, years after everyone else assumed Keynes and his fallacies were long dead and buried, will weave every apologia under the sun for whatever activity Emmanuel and the president he serves choose to undertake. The all-purpose pretext is ready at hand: why, we’ve got to do something about this terrible crisis.

Indeed we should do something—but, as usual, it’s exactly the opposite of what the federal government intends to do. We should cut the government’s budget as drastically as possible, thereby releasing resources for use by the productive sector. (That worked pretty well in stopping the terrible depression of 1920–21.) We should stop the Fed from interfering in the recovery process. We should let the private economy sort out which activities undertaken during the artificial Greenspan boom are genuine wealth-generating activities and which are wealth-destroying bubble activities. The latter should be promptly liquidated so their resources can be better employed by the former.

Meanwhile, we still have some conservatives, frozen in the 1980s, calling for reductions in marginal income tax rates, among other feckless suggestions. Tax reductions are desirable, to be sure, but the crisis we are facing is a systemic one that is not going to be fixed by marginal changes here and there. We need to start talking big changes. We need to open up questions the regime has long since considered closed. We need to talk about the monetary system, the Fed, entitlements, and much else.

In other words, if the Left can advocate $1 trillion-plus annual deficits as far as the eye can see, why can’t supporters of the free market be equally bold in the opposite direction?

Conservatives’ rediscovery of government frugality has been a refreshing thing to behold. The important thing now is for conservative intellectuals to be sure they know sound economics. For instance, the problem with the stimulus package isn’t the “pork,” however evil, stupid, and counterproductive it surely is. The problem is the Keynesian nonsense on which the very idea of “fiscal stimulus” is based. The problem is the mistaken view that “spending” is what the economy needs now, and that all our efforts must be expended on ways to revive consumer spending and borrowing. (I’ve discussed all this in detail elsewhere.)

The president has unveiled a program to help troubled homeowners make their mortgage payments and stay in their homes. He is going to encounter the same problem Charles Murray identified in the mid-1980s in his book Losing Ground: American Social Policy 1950–1980. There Murray famously argued that poverty persisted in the United States not in spite of anti-poverty programs, but because of them. Before evaluating the empirical evidence, though, Murray first explained why, from a theoretical point of view, we should in fact expect this perhaps counterintuitive result.

Murray challenged his readers to devise a social program that would not cause net harm. He gave the example of a government program aimed at discouraging smoking. I can’t reproduce his whole argument here, which is quite lengthy, but his point is that the reward the government offers for people who quit has to be substantial enough to persuade them to go to the trouble of quitting, but not so substantial as to encourage nonsmokers to start smoking. Just as Murray says, this task turns out to be borderline impossible. It is especially difficult when the program in question makes it more desirable to be out of work. Given man’s inclination to acquire wealth with the least possible exertion, such programs threaten to drag additional people into a cycle of dependency that mankind’s inclination to sloth will only reinforce over time.

For similar reasons, every attempt to solve the problems caused by a housing bubble that the Fed should not have blown up in the first place, such as the proposed measures for mortgage relief, will exacerbate the problems, thereby leading to still more government intervention, in the very pattern Ludwig von Mises identified in his famous essay “Middle-of-the-Road Policy Leads to Socialism.” That is the fallacy in the usual statement that “it would cost only $X billion to give every American who needs it” this or that benefit. Once people realize the government is giving out a benefit for free, more and more people will place themselves in the condition that entitles them to the benefit, thereby making the program ever more expensive.

The best outcome I can see is that under Obama the United States will experience the kind of economic stagnation that is now routine in Western Europe, with high unemployment and sluggish (if any) growth, and people standing around pretending not to know what could be causing it. A smaller and smaller core of productive firms and individuals will be expected to support a larger and larger demand for bailouts and other corporate and individual welfare. Who is John Galt, indeed.

The worst outcome, which we cannot dismiss out of hand, is a hyperinflationary destruction of the currency or, barring that, the reduction of America to banana-republic conditions.

Regardless of which of these outcomes actually occurs, the Obama administration will have moved the country farther away from a market economy than it has ever been in peacetime (barring perhaps the early years of the New Deal and its outright cartelization of industry), accelerating trends already at work under the Bush administration. If you want to succeed in the so-called private sector, you had better have some friends in Washington, because that’s where credit and capital will be allocated from.

And if you want to hold on to your wealth, assume the dollar is going to collapse. The euro is under terrific strain right now, and so the dollar may continue its artificial rally in the near term, but in light of the accelerating demands of the predatory sector (that is, the government) on the shrinking productive sector, the dollar’s bust has to come. The printing press will be the regime’s only way out. If this crisis doesn’t do it, the looming entitlement disaster will finish off the dollar. How else are $70 trillion in entitlement liabilities going to be paid for? Floating a few more bonds?

Things could get very bad indeed. If we are to have any chance of beating back these unprecedented incursions of the state, supporters of the free market need to know their position cold. Here are two reading lists I’ve assembled for that purpose (1, 2). I wrote my just-released book Meltdown for the same reason: to educate Americans about the causes of the crisis, to be sure, but also to give supporters of the free market the ammunition they need to make their case effectively.

Even that may prove not to be enough. We may have to be consoled with the knowledge that at least we fought with all our strength. And fight we must, as Ludwig von Mises urged: “No one can find a safe way out for himself if society is sweeping toward destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interest of everyone hangs on the result.”